4. Tax Withholding and Estimated Tax
Table of Contents
* What's New for 2006
* Reminders
* Introduction
* Useful Items - You may want to see:
* Withholding
o Salaries and Wages
o Tips
o Taxable Fringe Benefits
o Sick Pay
o Pensions and Annuities
o Gambling Winnings
o Unemployment Compensation
o Federal Payments
o Backup Withholding
* Estimated Tax
o Who Does Not Have To Pay Estimated Tax
o Who Must Pay Estimated Tax?
o How To Figure Estimated Tax
o When To Pay Estimated Tax
o How To Figure Each Payment
o How To Pay Estimated Tax
* Credit for Withholding and Estimated Tax
o Withholding
o Estimated Tax
* Underpayment Penalty
What's New for 2006
Tax law changes for 2006. When you figure how much income tax you want
withheld from your pay and when you figure your estimated tax, consider tax
law changes effective in 2006. See What's New for 2006 in the front of this
publication, or get Publication 553, Highlights of 2005 Tax Changes.
Reminders
Estimated tax safe harbor for higher income taxpayers. If your adjusted
gross income was more than $150,000 ($75,000 if you are married filing a
separate return), you will have to deposit the smaller of 90% of your
expected tax for 2006 or 110% of the tax shown on your 2005 return to avoid
an estimated tax penalty.
Payment of estimated tax by electronic funds withdrawal. You may be able to
pay your estimated tax by authorizing an automatic withdrawal from your
checking or savings account. For more information, see Payment by
Electronic Funds Withdrawal in chapter 2 of Publication 505.
Introduction
This chapter discusses how to pay your tax as you earn or receive income
during the year. In general, the federal income tax is a pay-as-you-go tax.
There are two ways to pay as you go.
*
Withholding. If you are an employee, your employer probably withholds
income tax from your pay. Tax may also be withheld from certain other
income, including pensions, bonuses, commissions, and gambling winnings. In
each case, the amount withheld is paid to the IRS in your name.
*
Estimated tax. If you do not pay your tax through withholding, or do
not pay enough tax that way, you might have to pay estimated tax. People
who are in business for themselves generally will have to pay their tax
this way. You may have to pay estimated tax if you receive income such as
dividends, interest, capital gains, rent, and royalties. Estimated tax is
used to pay not only income tax, but self-employment tax and alternative
minimum tax as well.
This chapter explains both of these methods. In addition, it explains the
following.
*
Credit for withholding and estimated tax. When you file your 2005
income tax return, take credit for all the income tax withheld from your
salary, wages, pensions, etc., and for the estimated tax you paid for 2005.
*
Underpayment penalty. If you did not pay enough tax during the year
either through withholding or by making estimated tax payments, you may
have to pay a penalty. The IRS usually can figure this penalty for you. See
Underpayment Penalty at the end of this chapter.
Useful Items - You may want to see:
Publication
*
505 Tax Withholding and Estimated Tax
*
553 Highlights of 2005 Tax Changes
*
919 How Do I Adjust My Tax Withholding?
Form (and Instructions)
*
W-4
Employee's Withholding Allowance Certificate
*
W-4P
Withholding Certificate for Pension or Annuity Payments
*
W-4S
Request for Federal Income Tax Withholding From Sick Pay
*
W-4V
Voluntary Withholding Request
*
1040-ES
Estimated Tax for Individuals
*
2210
Underpayment of Estimated Tax by Individuals, Estates, and Trusts
Withholding
This section discusses income tax withholding on these types of income:
*
Salaries and wages,
*
Tips,
*
Taxable fringe benefits,
*
Sick pay,
*
Pensions and annuities,
*
Gambling winnings,
*
Unemployment compensation, and
*
Certain federal payments, such as social security.
This section explains in detail the rules for withholding tax from each of
these types of income.
This section also covers backup withholding on interest, dividends, and
other payments.
Salaries and Wages
Income tax is withheld from the pay of most employees. Your pay includes
your regular pay, bonuses, commissions, and vacation allowances. It also
includes reimbursements and other expense allowances paid under a
nonaccountable plan. See Supplemental Wages, later, for more information
about reimbursements and allowances paid under a nonaccountable plan.
If your income is low enough that you will not have to pay income tax for
the year, you may be exempt from withholding. This is explained under
Exemption From Withholding, later.
Military retirees. Military retirement pay is treated in the same manner
as regular pay for income tax withholding purposes, even though it is
treated as a pension or annuity for other tax purposes.
Household workers. If you are a household worker, you can ask your
employer to withhold income tax from your pay.
Tax is withheld only if you want it withheld and your employer agrees to
withhold it. If you do not have enough income tax withheld, you may have to
pay estimated tax, as discussed later under Estimated Tax.
Farmworkers. Income tax is generally withheld from your cash wages for
work on a farm unless your employer both:
*
Pays you cash wages of less than $150 during the year, and
*
Has expenditures for agricultural labor totaling less than $2,500
during the year.
You can ask your employer to withhold income tax from noncash wages and
other wages not subject to withholding. If your employer does not agree to
withhold tax, or if not enough is withheld, you may have to pay estimated
tax, as discussed later under Estimated Tax.
Determining Amount of Tax Withheld Using Form W-4
The amount of income tax your employer withholds from your regular pay
depends on two things.
*
The amount you earn.
*
The information you give your employer on Form W-4.
Form W-4 includes three types of information that your employer will use to
figure your withholding.
*
Whether to withhold at the single rate or at the lower married rate.
*
How many withholding allowances you claim. (Each allowance reduces
the amount withheld.)
*
Whether you want an additional amount withheld.
Note.
You must specify a filing status and a number of withholding allowances on
Form W-4. You cannot specify only a dollar amount of withholding.
New Job
When you start a new job, you must fill out Form W-4 and give it to your
employer. Your employer should have copies of the form. If you need to
change the information later, you must fill out a new form.
If you work only part of the year (for example, you start working after the
beginning of the year), too much tax may be withheld. You may be able to
avoid overwithholding if your employer agrees to use the part-year method.
See Part-Year Method in chapter 1 of Publication 505 for more information.
Changing Your Withholding
Events during the year may change your marital status or the exemptions,
adjustments, deductions, or credits you expect to claim on your return.
When this happens, you may need to give your employer a new Form W-4 to
change your withholding status or number of allowances.
If the event changes your withholding status or the number of allowances
you are claiming, you must give your employer a new Form W-4 within 10 days
after either of the following.
*
Your divorce, if you have been claiming married status.
*
Any event that decreases the number of withholding allowances you can
claim.
Generally, you can submit a new Form W-4 whenever you wish to change the
number of your withholding allowances for any other reason.
Changing your withholding for 2007. If events in 2006 will decrease the
number of your withholding allowances for 2007, you must give your employer
a new Form W-4 by December 1, 2006. If the event occurs in December 2006,
submit a new Form W-4 within 10 days.
Checking Your Withholding
After you have given your employer a Form W-4, you can check to see whether
the amount of tax withheld from your pay is too little or too much. See
Publication 919, later. If too much or too little tax is being withheld,
you should give your employer a new Form W-4 to change your withholding.
Note.
You cannot give your employer a payment to cover withholding for past pay
periods or a payment for estimated tax.
Completing Form W-4 and Worksheets
Form W-4 has worksheets to help you figure how many withholding allowances
you can claim. The worksheets are for your own records. Do not give them to
your employer.
Two jobs. If you have income from two jobs at the same time, complete
only one set of Form W-4 worksheets. Then split your allowances between the
Forms W-4 for each job. You cannot claim the same allowances with more than
one employer at the same time. You can claim all your allowances with one
employer and none with the other, or divide them any other way.
Married individuals. If both you and your spouse are employed and expect
to file a joint return, figure your withholding allowances using your
combined income, adjustments, deductions, exemptions, and credits. Use only
one set of worksheets. You can divide your total allowances any way, but
you cannot claim an allowance that your spouse also claims.
If you and your spouse expect to file separate returns, figure your
allowances using separate worksheets based on your own individual income,
adjustments, deductions, exemptions, and credits.
Alternative method of figuring withholding allowances. You do not have to
use the Form W-4 worksheets if you use a more accurate method of figuring
the number of withholding allowances. See Alternative method of figuring
withholding allowances under Completing Form W-4 and Worksheets in chapter
1 of Publication 505 for more information.
Personal Allowances Worksheet. Use the Personal Allowances Worksheet on
page 1 of Form W-4 to figure your withholding allowances for exemptions and
any special allowances that apply.
Deductions and Adjustments Worksheet. Use this worksheet if you plan to
itemize your deductions or claim adjustments to your income and you want to
reduce your withholding.
Fill out this worksheet to adjust the number of your withholding
allowances for deductions, adjustments to income, and tax credits. The
Deductions and Adjustments Worksheet is on page 2 of Form W-4. Chapter 1 of
Publication 505 explains this worksheet.
Two-Earner/Two-Job Worksheet. You may need to complete this worksheet if
you have two jobs or a working spouse. You can also add to the amount, if
any, on line 8 of this worksheet, any additional withholding necessary to
cover any amount you expect to owe other than income tax, such as
self-employment tax.
Getting the Right Amount of Tax Withheld
In most situations, the tax withheld from your pay will be close to the tax
you figure on your return if you follow these two rules.
*
You accurately complete all the Form W-4 worksheets that apply to you.
*
You give your employer a new Form W-4 when changes occur.
But because the worksheets and withholding methods do not account for all
possible situations, you may not be getting the right amount withheld. This
is most likely to happen in the following situations.
*
You are married and both you and your spouse work.
*
You have more than one job at a time.
*
You have nonwage income, such as interest, dividends, alimony,
unemployment compensation, or self-employment income.
*
You will owe additional amounts with your return, such as
self-employment tax.
*
Your withholding is based on obsolete Form W-4 information for a
substantial part of the year.
Cumulative wage method. If you change the number of your withholding
allowances during the year, too much or too little tax may have been
withheld for the period before you made the change. You may be able to
compensate for this if your employer agrees to use the cumulative wage
withholding method for the rest of the year. You must ask in writing that
your employer use this method.
To be eligible, you must have been paid for the same kind of payroll
period (weekly, biweekly, etc.) since the beginning of the year.
Publication 919
To make sure you are getting the right amount of tax withheld, get
Publication 919. It will help you compare the total tax to be withheld
during the year with the tax you can expect to figure on your return. It
also will help you determine how much additional withholding, if any, is
needed each payday to avoid owing tax when you file your return. If you do
not have enough tax withheld, you may have to pay estimated tax, as
explained under Estimated Tax, later.
Rules Your Employer Must Follow
It may be helpful for you to know some of the withholding rules your
employer must follow. These rules can affect how to fill out your Form W-4
and how to handle problems that may arise.
New Form W-4. When you start a new job, your employer should give you a
Form W-4 to fill out. Your employer will use the information you give on
the form to figure your withholding beginning with your first payday.
If you later fill out a new Form W-4, your employer can put it into
effect as soon as possible. The deadline for putting it into effect is the
start of the first payroll period ending 30 or more days after you turn it in.
No Form W-4. If you do not give your employer a completed Form W-4, your
employer must withhold at the highest rate, as if you were single and
claimed no allowances.
Repaying withheld tax. If you find you are having too much tax withheld
because you did not claim all the withholding allowances you are entitled
to, you should give your employer a new Form W-4. Your employer cannot
repay any of the tax previously withheld.
However, if your employer has withheld more than the correct amount of
tax for the Form W-4 you have in effect, you do not have to fill out a new
Form W-4 to have your withholding lowered to the correct amount. Your
employer can repay the amount that was incorrectly withheld. If you are not
repaid, your Form W-2 will reflect the full amount actually withheld.
Exemption From Withholding
If you claim exemption from withholding, your employer will not withhold
federal income tax from your wages. The exemption applies only to income
tax, not to social security or Medicare tax.
You can claim exemption from withholding for 2006 only if both the
following situations apply.
*
For 2005 you had a right to a refund of all federal income tax
withheld because you had no tax liability.
*
For 2006 you expect a refund of all federal income tax withheld
because you expect to have no tax liability.
Student. If you are a student, you are not automatically exempt. See
chapter 1 to see whether you must file a return. If you work only part time
or only during the summer, you may qualify for exemption from withholding.
Age 65 or older or blind. If you are 65 or older or blind, use one of the
worksheets in chapter 1 of Publication 505, under Exemption From
Withholding, to help you decide whether you can claim exemption from
withholding. Do not use either worksheet if you will itemize deductions,
claim exemptions for dependents, or claim tax credits on your 2006 return.
See Itemizing deductions or claiming exemptions or credits in Publication 505.
Claiming exemption from withholding. To claim exemption, you must give
your employer a Form W-4. Enter “exempt” on line 7.
If you claim exemption, but later your situation changes so that you will
have to pay income tax after all, you must file a new Form W-4 within 10
days after the change. If you claim exemption in 2006, but you expect to
owe income tax for 2007, you must file a new Form W-4 by December 1, 2006.
Your claim of exempt status may be reviewed by the IRS.
An exemption is good for only 1 year. You must give your employer a new
Form W-4 by February 15 each year to continue your exemption.
Supplemental Wages
Supplemental wages include bonuses, commissions, overtime pay, vacation
allowances, certain sick pay, and expense allowances under certain plans.
The payer can figure withholding on supplemental wages using the same
method used for your regular wages. If these payments are identified
separately from your regular wages, your employer or other payer of
supplemental wages can withhold income tax from these wages at a flat rate.
Expense allowances. Reimbursements or other expense allowances paid by
your employer under a nonaccountable plan are treated as supplemental wages.
Reimbursements or other expense allowances paid under an accountable plan
that are more than your proven expenses are treated as paid under a
nonaccountable plan if you do not return the excess payments within a
reasonable period of time.
For more information about accountable and nonaccountable expense
allowance plans, see Reimbursements in chapter 26.
Penalties
You may have to pay a penalty of $500 if both of the following apply.
*
You make statements or claim withholding allowances on your Form W-4
that reduce the amount of tax withheld.
*
You have no reasonable basis for those statements or allowances at
the time you prepare your Form W-4.
There is also a criminal penalty for willfully supplying false or
fraudulent information on your Form W-4 or for willfully failing to supply
information that would increase the amount withheld. The penalty upon
conviction can be either a fine of up to $1,000 or imprisonment for up to 1
year, or both.
These penalties will apply if you deliberately and knowingly falsify your
Form W-4 in an attempt to reduce or eliminate the proper withholding of
taxes. A simple error, an honest mistake, will not result in one of these
penalties. For example, a person who has tried to figure the number of
withholding allowances correctly, but claims seven when the proper number
is six, will not be charged a W-4 penalty.
Tips
The tips you receive while working on your job are considered part of your
pay. You must include your tips on your tax return on the same line as your
regular pay. However, tax is not withheld directly from tip income, as it
is from your regular pay. Nevertheless, your employer will take into
account the tips you report when figuring how much to withhold from your
regular pay.
See chapter 6 for information on reporting your tips to your employer. For
more information on the withholding rules for tip income, see Publication
531, Reporting Tip Income.
How employer figures amount to withhold. The tips you report to your
employer are counted as part of your income for the month you report them.
Your employer can figure your withholding in either of two ways.
*
By withholding at the regular rate on the sum of your pay plus your
reported tips.
*
By withholding at the regular rate on your pay plus a percentage of
your reported tips.
Not enough pay to cover taxes. If your regular pay is not enough for your
employer to withhold all the tax (including income tax, social security
tax, Medicare tax, or railroad retirement tax) due on your pay plus your
tips, you can give your employer money to cover the shortage. See Giving
your employer money for taxes in chapter 6.
Allocated tips. Your employer should not withhold income tax, social
security tax, Medicare tax, or railroad retirement tax on any allocated
tips. Withholding is based only on your pay plus your reported tips. Your
employer should refund to you any incorrectly withheld tax. See Allocated
Tips in chapter 6 for more information.
Taxable Fringe Benefits
The value of certain fringe benefits you receive from your employer is
considered part of your pay. Your employer generally must withhold income
tax on these benefits from your regular pay.
For information on fringe benefits, see Fringe Benefits under Employee
Compensation in chapter 5.
Your employer can choose not to withhold income tax on the value of your
personal use of an employer-provided car, truck, or other highway motor
vehicle. Your employer must notify you if this choice is made.
For more information on withholding on taxable fringe benefits, see chapter
1 of Publication 505.
Sick Pay
Sick pay is a payment to you to replace your regular wages while you are
temporarily absent from work due to sickness or personal injury. To qualify
as sick pay, it must be paid under a plan to which your employer is a party.
If you receive sick pay from your employer or an agent of your employer,
income tax must be withheld. An agent who does not pay regular wages to you
may choose to withhold income tax at a flat rate.
However, if you receive sick pay from a third party who is not acting as an
agent of your employer, income tax will be withheld only if you choose to
have it withheld. See Form W-4S, later.
If you receive payments under a plan in which your employer does not
participate (such as an accident or health plan where you paid all the
premiums), the payments are not sick pay and usually are not taxable.
Union agreements. If you receive sick pay under a collective bargaining
agreement between your union and your employer, the agreement may determine
the amount of income tax withholding. See your union representative or your
employer for more information.
Form W-4S. If you choose to have income tax withheld from sick pay paid
by a third party, such as an insurance company, you must fill out Form
W-4S. Its instructions contain a worksheet you can use to figure the amount
you want withheld. They also explain restrictions that may apply.
Give the completed form to the payer of your sick pay. The payer must
withhold according to your directions on the form.
If you do not request withholding on Form W-4S, or if you do not have
enough tax withheld, you may have to make estimated tax payments. If you do
not pay enough estimated tax or have enough income tax withheld, you may
have to pay a penalty.
Pensions and Annuities
Income tax usually will be withheld from your pension or annuity
distributions unless you choose not to have it withheld. This rule applies
to distributions from:
*
A traditional individual retirement arrangement (IRA),
*
A life insurance company under an endowment, annuity, or life
insurance contract,
*
A pension, annuity, or profit-sharing plan,
*
A stock bonus plan, and
*
Any other plan that defers the time you receive compensation.
The amount withheld depends on whether you receive payments spread out over
more than 1 year (periodic payments), within 1 year (nonperiodic payments),
or as an eligible rollover distribution (ERD). You cannot choose not to
have income tax withheld from an ERD.
More information. For more information on taxation of annuities and
distributions (including eligible rollover distributions) from qualified
retirement plans, see chapter 10. For information on IRAs, see chapter 17.
For more information on withholding on pensions and annuities, including a
discussion of Form W-4P, see Pensions and Annuities in chapter 1 of
Publication 505.
Gambling Winnings
Income tax is withheld from certain kinds of gambling winnings at a flat rate.
Gambling winnings of more than $5,000 from the following sources are
subject to income tax withholding.
*
Any sweepstakes, wagering pool, or lottery.
*
Any other wager, if the proceeds are at least 300 times the amount of
the bet.
It does not matter whether your winnings are paid in cash, in property, or
as an annuity. Winnings not paid in cash are taken into account at their
fair market value.
Gambling winnings from bingo, keno, and slot machines generally are not
subject to income tax withholding. However, you may need to provide the
payer with a social security number to avoid withholding. See Backup
withholding on gambling winnings in Publication 505. If you receive
gambling winnings not subject to withholding, you may need to pay estimated
tax. See Estimated Tax, later.
If you do not pay enough tax through withholding or estimated tax payments,
you may have to pay a penalty. See Underpayment Penalty, later.
Form W-2G. If a payer withholds income tax from your gambling winnings,
you should receive a Form W-2G, Certain Gambling Winnings, showing the
amount you won and the amount withheld. Report the tax withheld on line 64
of Form 1040.
Unemployment Compensation
You can choose to have income tax withheld from unemployment compensation.
To make this choice, you will have to fill out Form W-4V (or a similar form
provided by the payer) and give it to the payer.
Unemployment compensation is taxable. So, if you do not have income tax
withheld, you may have to pay estimated tax. See Estimated Tax, later.
If you do not pay enough tax either through withholding or estimated tax,
you may have to pay a penalty. See Underpayment Penalty, later, for
information.
Federal Payments
You can choose to have income tax withheld from certain federal payments
you receive. These payments are:
1.
Social security benefits,
2.
Tier 1 railroad retirement benefits,
3.
Commodity credit loans you choose to include in your gross income, and
4.
Payments under the Agricultural Act of 1949 (7 U.S.C. 1421 et. seq.),
or title II of the Disaster Assistance Act of 1988, as amended, that are
treated as insurance proceeds and that you receive because:
1.
Your crops were destroyed or damaged by drought, flood, or any
other natural disaster, or
2.
You were unable to plant crops because of a natural disaster
described in (a).
To make this choice, you will have to fill out Form W-4V (or a similar form
provided by the payer) and give it to the payer.
If you do not choose to have income tax withheld, you may have to pay
estimated tax. See Estimated Tax, later.
If you do not pay enough tax either through withholding or estimated tax,
you may have to pay a penalty. See Underpayment Penalty, later, for
information.
More information. For more information about the tax treatment of social
security and railroad retirement benefits, see chapter 11. Get Publication
225, Farmer's Tax Guide, for information about the tax treatment of
commodity credit loans or crop disaster payments.
Backup Withholding
Banks and other businesses that pay you certain kinds of income must file
an information return (Form 1099) with the IRS. The information return
shows how much you were paid during the year. It also includes your name
and taxpayer identification number (TIN). TINs are explained in chapter 1.
These payments generally are not subject to withholding. However, “backup”
withholding is required in certain situations. Backup withholding can apply
to most kinds of payments that are reported on Form 1099.
The payer must withhold at a flat rate in the following situations.
*
You do not give the payer your TIN in the required manner.
*
The IRS notifies the payer that the TIN you gave is incorrect.
*
You are required, but fail, to certify that you are not subject to
backup withholding.
*
The IRS notifies the payer to start withholding on interest or
dividends because you have underreported interest or dividends on your
income tax return. The IRS will do this only after it has mailed you four
notices over at least a 210-day period.
See Backup Withholding in chapter 1 of Publication 505 for more information.
Penalties. There are civil and criminal penalties for giving false
information to avoid backup withholding. The civil penalty is $500. The
criminal penalty, upon conviction, is a fine of up to $1,000 or
imprisonment of up to 1 year, or both.
Estimated Tax
Estimated tax is the method used to pay tax on income that is not subject
to withholding. This includes income from self-employment, interest,
dividends, alimony, rent, gains from the sale of assets, prizes, and
awards. You also may have to pay estimated tax if the amount of income tax
being withheld from your salary, pension, or other income is not enough.
Estimated tax is used to pay both income tax and self-employment tax, as
well as other taxes and amounts reported on your tax return. If you do not
pay enough through withholding or estimated tax payments, you may have to
pay a penalty. If you do not pay enough by the due date of each payment
period (see When To Pay Estimated Tax, later), you may be charged a penalty
even if you are due a refund when you file your tax return. For information
on when the penalty applies, see Underpayment Penalty, later.
Who Does Not Have To Pay Estimated Tax
If you receive salaries or wages, you can avoid having to pay estimated tax
by asking your employer to take more tax out of your earnings. To do this,
give a new Form W-4 to your employer. See chapter 1 of Publication 505.
Estimated tax not required. You do not have to pay estimated tax for 2006
if you meet all three of the following conditions.
*
You had no tax liability for 2005.
*
You were a U.S. citizen or resident for the whole year.
*
Your 2005 tax year covered a 12-month period.
You had no tax liability for 2005 if your total tax was zero or you did
not have to file an income tax return.
Who Must Pay Estimated Tax?
If you had a tax liability for 2005, you may have to pay estimated tax for
2006.
This image is too large to be displayed in the current screen. Please click
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Figure 4-A Do You Have To Pay Estimated Tax?
General rule. You must pay estimated tax for 2006 if both of the
following apply.
1.
You expect to owe at least $1,000 in tax for 2006 after subtracting
your withholding and credits.
2.
You expect your withholding and credits to be less than the smaller of:
1.
90% of the tax to be shown on your 2006 tax return, or
2.
100% of the tax shown on your 2005 tax return. Your 2005 tax
return must cover all 12 months.
Special rules for farmers, fishermen, and higher income taxpayers. There
are exceptions to the general rule for farmers, fishermen, and certain
higher income taxpayers. See Figure 4-A and chapter 2 of Publication 505
for more information.
Aliens. Resident and nonresident aliens may also have to pay estimated
tax. Resident aliens should follow the rules in this chapter unless noted
otherwise. Nonresident aliens should get Form 1040-ES(NR), U.S. Estimated
Tax for Nonresident Alien Individuals.
Married taxpayers. To figure whether you must pay estimated tax, apply
the rules discussed here to your separate estimated income. If you can make
joint estimated tax payments, you can apply these rules on a joint basis.
You and your spouse can make joint estimated tax payments even if you are
not living together.
You and your spouse cannot make joint estimated tax payments if:
*
You are legally separated under a decree of divorce or separate
maintenance,
*
You and your spouse have different tax years, or
*
Either spouse is a nonresident alien (unless you elected to be
treated as a resident alien (see chapter 1 of Publication 519)).
Whether you and your spouse make joint estimated tax payments or separate
payments will not affect your choice of filing a joint tax return or
separate returns for 2006.
2005 separate returns and 2006 joint return. If you plan to file a joint
return with your spouse for 2006, but you filed separate returns for 2005,
your 2005 tax is the total of the tax shown on your separate returns. You
filed a separate return if you filed as single, head of household, or
married filing separately.
2005 joint return and 2006 separate returns. If you plan to file a
separate return for 2006, but you filed a joint return for 2005, your 2005
tax is your share of the tax on the joint return. You file a separate
return if you file as single, head of household, or married filing separately.
To figure your share of the tax on the joint return, first figure the tax
both you and your spouse would have paid had you filed separate returns for
2005 using the same filing status as for 2006. Then multiply the tax on the
joint return by the following fraction.
The tax you would have paid had you filed a separate return
The total tax you and your spouse would have paid had you filed separate
returns
Example.
Joe and Heather filed a joint return for 2005 showing taxable income of
$48,500 and a tax of $6,549. Of the $48,500 taxable income, $40,100 was
Joe's and the rest was Heather's. For 2006, they plan to file married
filing separately. Joe figures his share of the tax on the 2005 joint
return as follows.
Tax on $40,100 based on a separate
return $6,696
Tax on $8,400 based on a separate
return 899
Total $ 7,595
Joe's percentage of total ($6,696 ÷
$7,595) 88%
Joe's share of tax on joint return
($6,549 × 88%) $ 5,763
How To Figure Estimated Tax
To figure your estimated tax, you must figure your expected adjusted gross
income, taxable income, taxes, deductions, and credits for the year.
When figuring your 2006 estimated tax, it may be helpful to use your
income, deductions, and credits for 2005 as a starting point. Use your 2005
federal tax return as a guide. You can use Form 1040-ES to figure your
estimated tax.
You must make adjustments both for changes in your own situation and for
recent changes in the tax law. For 2006, there are several changes in the
law. Some of these changes are discussed in Publication 553, Highlights of
2005 Tax Changes, or visit the IRS website at www.irs.gov.
Form 1040-ES includes a worksheet to help you figure your estimated tax.
Keep the worksheet for your records.
For more complete information and examples of how to figure your estimated
tax for 2006, see chapter 2 of Publication 505.
When To Pay Estimated Tax
For estimated tax purposes, the year is divided into four payment periods.
Each period has a specific payment due date. If you do not pay enough tax
by the due date of each of the payment periods, you may be charged a
penalty even if you are due a refund when you file your income tax return.
The following chart gives the payment periods and due dates for estimated
tax payments.
For the period: Due date:
Jan. 1* through Mar. 31 Apr. 15
April 1 through May 31 June 15
June 1 through Aug. 31 Sept. 15
Sept. 1 through Dec. 31 Jan. 15
next year**
*If your tax year does not begin on January 1, see the Form 1040-ES
instructions.
**See January payment, later.
Saturday, Sunday, holiday rule. If the due date for an estimated tax
payment falls on a Saturday, Sunday, or legal holiday, the payment will be
on time if you make it on the next day that is not a Saturday, Sunday, or
legal holiday. For example, a payment due Monday, January 15, 2007, will be
on time if you make it by Tuesday, January 16, 2007. January 15 is a legal
holiday.
January payment. If you file your 2006 Form 1040 or Form 1040A by January
31, 2007, and pay the rest of the tax you owe, you do not need to make the
payment due on January 16, 2007.
Fiscal year taxpayers. If your tax year does not start on January 1, see
the Form 1040-ES instructions for your payment due dates.
When To Start
You do not have to make estimated tax payments until you have income on
which you will owe the tax. If you have income subject to estimated tax
during the first payment period, you must make your first payment by the
due date for the first payment period. You can pay all your estimated tax
at that time, or you can pay it in installments. If you choose to pay in
installments, make your first payment by the due date for the first payment
period. Make your remaining installment payments by the due dates for the
later periods.
No income subject to estimated tax during first period. If you do not
have income subject to estimated tax until a later payment period, you can
make your first payment by the due date for that period. You can pay your
entire estimated tax by the due date for that period, or you can pay it in
installments by the due date for that period and the due dates for the
remaining periods. The following chart shows when to make installment payments.
If you first have income on which you must pay estimated tax: Make a
payment
by: Make later
installments
by:
Before Apr. 1 Apr. 15 June 15
Sept. 15
Jan. 15 next
year*
After Mar. 31
and
before June 1 June 15 Sept. 15
Jan. 15 next
year*
After May 31
and
before Sept. 1 Sept. 15 Jan. 15 next
year*
After Aug. 31 Jan. 15
next year* (None)
*See January payment, and Saturday, Sunday, holiday rule under When To Pay
Estimated Tax, earlier.
How much to pay to avoid a penalty. To determine how much you should pay
by each payment due date, see How To Figure Each Payment, next. If the
earlier discussion of No income subject to estimated tax during first
period or the later discussion of Change in estimated tax applies to you,
you may need to read Annualized Income Installment Method in chapter 2 of
Publication 505 for information on how to avoid a penalty.
How To Figure Each Payment
You should pay enough estimated tax by the due date of each payment period
to avoid a penalty for that period. You can figure your required payment
for each period by using either the regular installment method or the
annualized income installment method. These methods are described in
Publication 505. If you do not pay enough each payment period, you may be
charged a penalty even if you are due a refund when you file your tax return.
Underpayment penalty. If your estimated tax payment for a previous period
is less than one-fourth of your amended estimated tax, you may be charged a
penalty for underpayment of estimated tax for that period when you file
your tax return. See chapter 4 of Publication 505 for more information.
Change in estimated tax. After you make an estimated tax payment, changes
in your income, adjustments, deductions, credits, or exemptions may make it
necessary for you to refigure your estimated tax. Pay the unpaid balance of
your amended estimated tax by the next payment due date after the change or
in installments by that date and the due dates for the remaining payment
periods.
Estimated Tax Payments Not Required
You do not have to pay estimated tax if your withholding in each payment
period is at least as much as:
*
One-fourth of your required annual payment, or
*
Your required annualized income installment for that period.
You also do not have to pay estimated tax if you will pay enough through
withholding to keep the amount you owe with your return under $1,000.
How To Pay Estimated Tax
There are five ways to pay estimated tax.
*
By crediting an overpayment on your 2005 return to your 2006
estimated tax.
*
By sending in your payment with a payment voucher from Form 1040-ES.
*
By using the Electronic Federal Tax Payment System (EFTPS). For EFTPS
information, see chapter 1.
*
By electronic funds withdrawal if you are filing Form 1040 or Form
1040A electronically.
*
By credit card using a pay-by-phone system or the Internet.
Crediting an Overpayment
When you file your Form 1040 or Form 1040A for 2005 and you have an
overpayment of tax, you can apply part or all of it to your estimated tax
for 2006. On line 74 of Form 1040, or line 46 of Form 1040A, enter the
amount you want credited to your estimated tax rather than refunded. The
amount you have credited should be taken into account when figuring your
estimated tax payments.
The credit will be applied to your payments in the order necessary to avoid
the penalty for underpayment of estimated tax. You cannot have any of that
amount refunded to you until the close of that tax year. You also cannot
use that overpayment in any other way.
Using the Payment Vouchers
Each payment of estimated tax must be accompanied by a payment voucher from
Form 1040-ES. If you made estimated tax payments last year, you should
receive a copy of the 2006 Form 1040-ES in the mail. It will have payment
vouchers preprinted with your name, address, and social security number.
Using the preprinted vouchers will speed processing, reduce the chance of
error, and help save processing costs.
If you did not pay estimated tax last year, you will have to get Form
1040-ES. After you make your first payment, a Form 1040-ES package with the
preprinted vouchers will be mailed to you. Follow the instructions in the
package to make sure you use the vouchers correctly.
Use the window envelopes that came with your Form 1040-ES package. If you
use your own envelope, make sure you mail your payment vouchers to the
address shown in the Form 1040-ES instructions for the place where you live.
Caution
Do not use the address shown in the Form 1040 or Form 1040A instructions.
If you file a joint return and you are making joint estimated tax payments,
please enter the names and social security numbers on the payment voucher
in the same order as they will appear on the joint return.
Change of address. You must notify the IRS if you are making estimated
tax payments and you changed your address during the year. You must send a
clear and concise written statement to the IRS Service Center where you
filed your last return and provide all of the following:
*
Your full name (and spouse's full name),
*
Your signature (and spouse's signature),
*
Your old address (and spouse's old address if different),
*
Your new address, and
*
Your social security number (and spouse's social security number).
You can use Form 8822, Change of Address, for this purpose.
You can continue to use your old preprinted payment vouchers until the
IRS sends you new ones. However, do not correct the address on the old voucher.
Payment by Electronic Funds Withdrawal or Credit Card
If you want to make estimated payments by electronic funds withdrawal or by
credit card, see the Form 1040-ES instructions or How To Pay Estimated Tax
in Publication 505.
Credit for Withholding and Estimated Tax
When you file your 2005 income tax return, take credit for all the income
tax and excess social security or railroad retirement tax withheld from
your salary, wages, pensions, etc. Also, take credit for the estimated tax
you paid for 2005. These credits are subtracted from your tax. You should
file a return and claim these credits, even if you do not owe tax.
If you had two or more employers and were paid wages of more than $90,000
during 2005, too much social security or railroad retirement tax may have
been withheld from your wages. See Credit for Excess Social Security Tax or
Railroad Retirement Tax Withheld in chapter 37.
Withholding
If you had income tax withheld during 2005, you should be sent a statement
by January 31, 2006, showing your income and the tax withheld. Depending on
the source of your income, you will receive:
*
Form W-2, Wage and Tax Statement,
*
Form W-2G, Certain Gambling Winnings, or
*
A form in the 1099 series.
Forms W-2 and W-2G. You file Form W-2 with your income tax return. File
Form W-2G with your return if it shows any federal income tax withheld from
your winnings.
You should get at least two copies of each form you receive. Attach one
copy to the front of your federal income tax return. Keep one copy for your
records. You should also receive copies to file with your state and local
returns.
Form W-2
Your employer should send you a Form W-2 for 2005 by January 31, 2006. You
should receive a separate Form W-2 from each employer you worked for.
If you stopped working before the end of the year, your employer could have
given you your Form W-2 at any time after you stopped working. However,
your employer must send it to you by January 31, 2006.
If you ask for the form, your employer must send it to you within 30 days
after receiving your written request or within 30 days after your final
wage payment, whichever is later.
If you have not received your Form W-2 on time, you should ask your
employer for it. If you do not receive it by February 15, call the IRS.
Form W-2 shows your total pay and other compensation and the income tax,
social security tax, and Medicare tax that was withheld during the year.
Include the federal income tax withheld (as shown on Form W-2) on:
*
Line 64 if you file Form 1040,
*
Line 39 if you file Form 1040A, or
*
Line 7 if you file Form 1040EZ.
Form W-2 is also used to report any taxable sick pay you received and any
income tax withheld from your sick pay.
Form W-2G
If you had gambling winnings in 2005, the payer may have withheld income
tax. If tax was withheld, the payer will give you a Form W-2G showing the
amount you won and the amount of tax withheld.
Report the amounts you won on line 21 of Form 1040. Take credit for the tax
withheld on line 64 of Form 1040. If you had gambling winnings, you must
use Form 1040; you cannot use Form 1040A or Form 1040EZ.
The 1099 Series
Most forms in the 1099 series are not filed with your return. You should be
sent these forms by January 31, 2006. Keep these forms for your records.
There are several different forms in this series, including:
*
Form 1099-B, Proceeds From Broker and Barter Exchange Transactions,
*
Form 1099-DIV, Dividends and Distributions,
*
Form 1099-G, Certain Government Payments,
*
Form 1099-INT, Interest Income,
*
Form 1099-MISC, Miscellaneous Income,
*
Form 1099-OID, Original Issue Discount,
*
Form 1099-R, Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,
*
Form SSA-1099, Social Security Benefit Statement, and
*
Form RRB-1099, Payments by the Railroad Retirement Board.
If you received the types of income reported on some forms in the 1099
series, you may not be able to use Form 1040A or Form 1040EZ. See the
instructions to these forms for details.
Form 1099-R. Attach Form 1099-R to your return if box 4 shows federal
income tax withheld. Include the amount withheld in the total on line 64 of
Form 1040 or line 39 of Form 1040A. You cannot use Form 1040EZ if you
received payments reported on Form 1099-R.
Backup withholding. If you were subject to backup withholding on income
you received during 2005, include the amount withheld, as shown on your
Form 1099, in the total on line 64 of Form 1040, line 39 of Form 1040A, or
line 7 of Form 1040EZ.
Form Not Correct
If you receive a form with incorrect information on it, you should ask the
payer for a corrected form. Call the telephone number or write to the
address given for the payer on the form. The corrected Form W-2G or Form
1099 you receive will be marked “Corrected.” A special form, Form W-2c,
Corrected Wage and Tax Statement, is used to correct a Form W-2.
Form Received After Filing
If you file your return and you later receive a form for income that you
did not include on your return, you should report the income and take
credit for any income tax withheld by filing Form 1040X, Amended U.S.
Individual Income Tax Return.
Separate Returns
If you are married but file a separate return, you can take credit only for
the tax withheld from your own income. Do not include any amount withheld
from your spouse's income. However, different rules may apply if you live
in a community property state.
Community property states are listed in chapter 2. For more information on
these rules, and some exceptions, see Publication 555, Community Property.
Fiscal Years
If you file your tax return on the basis of a fiscal year (a 12-month
period ending on the last day of any month except December), you must
follow special rules to determine your credit for federal income tax
withholding. For a discussion of how to take credit for withholding on a
fiscal year return, see Fiscal Years in chapter 3 of Publication 505.
Estimated Tax
Take credit for all your estimated tax payments for 2005 on line 65 of Form
1040 or line 40 of Form 1040A. Include any overpayment from 2004 that you
had credited to your 2005 estimated tax. You must use Form 1040 or Form
1040A if you paid estimated tax. You cannot use Form 1040EZ.
Name changed. If you changed your name, and you made estimated tax
payments using your old name, attach a brief statement to the front of your
tax return indicating:
*
When you made the payments,
*
The amount of each payment,
*
The IRS address to which you sent the payments,
*
Your name when you made the payments, and
*
Your social security number.
The statement should cover payments you made jointly with your spouse as
well as any you made separately.
Separate Returns
If you and your spouse made separate estimated tax payments for 2005 and
you file separate returns, you can take credit only for your own payments.
If you made joint estimated tax payments, you must decide how to divide the
payments between your returns. One of you can claim all of the estimated
tax paid and the other none, or you can divide it in any other way you
agree on. If you cannot agree, you must divide the payments in proportion
to each spouse's individual tax as shown on your separate returns for 2005.
Divorced Taxpayers
If you made joint estimated tax payments for 2005, and you were divorced
during the year, either you or your former spouse can claim all of the
joint payments, or you each can claim part of them. If you cannot agree on
how to divide the payments, you must divide them in proportion to each
spouse's individual tax as shown on your separate returns for 2005.
If you claim any of the joint payments on your tax return, enter your
former spouse's social security number (SSN) in the space provided on the
front of Form 1040 or Form 1040A. If you divorced and remarried in 2005,
enter your present spouse's SSN in that space and write your former
spouse's SSN, followed by “DIV,” to the left of line 65, Form 1040, or line
40, Form 1040A.
Underpayment Penalty
If you did not pay enough tax either through withholding or by making
estimated tax payments, you will have an underpayment of estimated tax and
you may have to pay a penalty. Generally, you will not have to pay a
penalty for 2005 if any of the following situations applies.
*
The total of your withholding and estimated tax payments was at least
as much as your 2004 tax (or 110% of your 2004 tax if your adjusted gross
income was more than $150,000, $75,000 if your 2005 filing status is
married filing separately) and you paid all required estimated tax payments
on time.
*
The tax balance due on your return is no more than 10% of your total
2005 tax, and you paid all required estimated tax payments on time.
*
Your total 2005 tax minus your withholding is less than $1,000.
*
You did not have a tax liability for 2004.
*
You did not have any withholding taxes and your current year tax less
any household employment taxes is less than $1,000.
Special rules apply if you are a farmer or fisherman. See Farmers and
Fishermen in chapter 4 of Publication 505 for more information.
IRS can figure the penalty for you. If you think you owe the penalty but
you do not want to figure it yourself when you file your tax return, you
may not have to. Generally, the IRS will figure the penalty for you and
send you a bill. However, you must complete Form 2210 and attach it to your
return if you think you are able to lower or eliminate your penalty. See
chapter 4 of Publication 505. |
